This Hot Stock Just Keeps Going Up and Up

Melvin Pasternak's picture

Monday, May 2, 2011 - 9:00am

by Melvin Pasternak

If you've read my wife, Carla Pasternak's High-Yield Investing newsletter or her free Dividend Opportunities publication, you know she spots investment trends with uncanny accuracy.

Carla's trend-spotting ability also carries over to her fashion choices. She prefers the latest styles -- especially when hitting the gym, which she does several times a week.

We recently celebrated Carla's birthday. I knew one gift that would be a sure hit -- a new workout outfit from the popular yoga and fitness apparel store, Lululemon Athletica (NYSE: LULU).

When I went to the mall, I was struck by how busy the apparel store was. It was abuzz with women scouring the racks in search of appealing yoga and workout clothing and trendy spring jackets.

Lululemon's popularity reminds me Peter Lynch's famous dictum that says you can pick outstanding stocks by observing the busiest stores in the mall.
Lululemon is definitely one of them.

Much of the brand's success can be attributed to the fact that it serves an underrepresented market niche. The company markets itself as an exclusive, high-end fashion destination for sophisticated, educated women.

In contrast, fitness apparel companies like Under Armor (NYSE: UA) and Foot Locker (NYSE: FL) have only recently begun appealing more to sporty female audiences.

Driven by growing sales, the Canadian company, headquartered in Vancouver, also has a growing presence in the United States and Australia. By the end of 2011, the apparel store plans to build 35 new outlets. Lululemon is also growing its online presence. By the end of this year, it expects 15% of sales to come through e-commerce.

Such growth creates a bullish technical picture for the stock.


 
Lulelemon has been on Major uptrend for almost the past two years and is currently trading near its recent all-time high of $102.83, hit during the April 18 trading week.
The stock has been in an accelerated uptrend since late-August 2010 and remains well above it despite the recent pullback.

Between December 2010 and March 2011, Lulelemon tested a zone of support, around $72.69 and $74.60. But in mid-March, the stock broke through this resistance level, bullishly completing a small base. The stock has been rising steadily since.

Lulelemon shares are now on the verge of bullishly breaking out of a second small ascending triangle pattern, marked by resistance at the stock's recent high of $102.83 and the accelerated uptrend line.

If Lulelemon can break past this resistance level, the measuring principle for a triangle -- taken by adding the height of the triangle to the breakout level -- projects a price target of $131.06 ($102.83 - $74.60 = $28.23; $28.23 + $102.83 = $131.06), representing at least 28% growth in the share price.

It is also important to note that Lululemon has proposed a two-for-one stock split, set for June 8, 2011. The stock may run up in anticipation of this split.
Fundamentally, LULU looks strong.

In mid-March, the company announced upbeat fiscal fourth-quarter and full-year 2010 results. Due to strong demand for its clothing, fiscal fourth-quarter revenue soared 53% to $245.4 million, from $160.6 million in the year-ago period. Likewise, fiscal full-year 2010 revenue jumped 57% to $717.7 million, from $452.9 million in the previous fiscal year.

For the upcoming fiscal first-quarter, the company expects revenue to increase at least 26.5% to the range of $175-$180 million, from $138.3 million in the comparable period a year ago.

For the full 2011 fiscal year, the apparel company expects strong demand for its product to push revenue up at least 24.4% to $885-$900 million.
The earnings outlook is equally robust.

Fiscal fourth-quarter earnings increased 90% to $0.76, from $0.40 in the previous year. Full-year fiscal 2010 earnings rocketed up 106% to $1.69, from $0.82 in the year earlier period. The company projects fiscal first-quarter earnings will come in at least 33% higher than last year, in the range of $0.36-$0.38, up from $0.27.

For the full 2011 fiscal year, the company expects earnings to increase at least 12.4% to $1.90-$2.00.

With the goal of establishing itself as the world's top women's athletic wear brand, Lululemon is well on its way. Admittedly the stock's current valuation reflects its rapid growth, but the company has $316.3 million in available cash and no long-term debt. This liquidity gives it the financial freedom to continue to expand locations while developing fashion-forward clothing lines.

Action to take --> If Lululemon can break past nearby resistance at $102.83, it will bullishly complete an ascending triangle pattern. With no historical resistance in sight, and expected upbeat fiscal first-quarter results to be released in June, the stock should continue to move higher and net traders a nice profit. I anticipate the share price will also benefit from the early June split.

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Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.